One of the biggest problems we see in divorce situations is who gets the home. In most cases where the wife has primary physical custody of young children, she wants to stay in the home. This is understandable as she may want the children to continue in the same school or she simply wants to keep their lives and routines as consistent as they were before the divorce.

While we can certainly understand the desire to keep the home, this decision can present some financial risks for one or both of the divorcing parties.

Let’s look at some possible scenarios and their possible consequences:

1. The parties agree that the wife will stay in the house and buy the husband’s share of the capital stock. In situations where the husband and wife have similar income and savings, this may be a perfectly viable option. The wife will simply obtain a mortgage in her own name, the husband’s name will be removed from the deed, and the wife will pay the husband half of the equity in the home from existing savings or investments.

The situation is complicated when the wife’s income may be significantly lower or if she has been out of the workforce while taking care of the children. It may be difficult or impossible for her to qualify for a mortgage in her own name based on her current income (or lack thereof). Although lenders will include child support and / or alimony received in their calculations, most will want to see 6 to 12 months of constant payments and a court order before considering support as income. So even if your divorce becomes final next month and the agreement requires you to receive monthly support, until there is a trail of payments for 6 to 12 months, the bank will likely not include those payments as income for you. Also, many spouses can receive financial support during the separation, but before the divorce is final. Since these payments are not subject to a court order, they will not be counted either.

2. Because the remaining spouse cannot qualify for a new mortgage, it is agreed that this spouse will pay the mortgage and related expenses even if the loan is in the other spouse’s name. This may seem like a reasonable decision at first. In order to keep the children in their home, the spouse whose name is on the mortgage agrees to let their ex live in the home as long as they pay the mortgage, taxes, and insurance. At some point in the future, perhaps when the children are out of school, the house can be sold and the equity can then be divided. There are some potential pitfalls with this scenario.

First, the spouse who will not be living in the home may want to buy another home one day. While some high-income people may qualify for a second mortgage, most people will not be able to get a loan to buy a new home if they still have a mortgage on the first home.

Second, what happens if the spouse who lives in the house falls behind on the mortgage? Or, worse yet, stop paying it altogether? Although the divorce agreement may explicitly state that the spouse in the home is responsible for paying the mortgage, the lender only recognizes the name on the promissory note. If there is delinquency or even a foreclosure, it will affect the credit of the spouse whose name is on the mortgage. Because there are no adverse consequences for late payments by the spouse at home, he or she may decide to pay other expenses first, knowing that late payments will only affect the former.

3. One spouse insists on keeping the marital home, so the other spouse keeps most of the savings, investment, and retirement accounts. This is another common situation that we come across. I have seen many divorce settlements that divide all marital assets equally, but one spouse ends up with mostly liquid assets (such as savings accounts, stocks, mutual funds) and the other ends up with the house, which is very illiquid. If the spouse who gets the house has little or no additional emergency funds or savings, they are really playing with fire. An adverse situation like job loss, disability, or a major home repair can ruin them financially. If you decide to forgo other, more liquid assets in favor of keeping your home, be sure to plan for the unforeseen problems that inevitably seem to occur.

The point here is to consider all the “what ifs” that might occur in the future before making a decision about what to do with the marital home. It’s often your biggest marital asset, so think about all the pros and cons before signing your agreement.